The Bank of Japan (BoJ) has sent shockwaves through global markets with its decision to raise interest rates to a 31-year high of 1%, up from 0.75%. This quarter-point hike is a significant policy shift for Japan, as borrowing costs now reach levels not seen since 1995. The move comes against the backdrop of ongoing inflationary pressures fuelled by the Iran war, despite a recent dip in oil prices and Japan's annual core inflation falling to 1.4% in April.
Policymakers in Tokyo have expressed concern that businesses are rapidly passing on rising oil costs to consumers, exacerbating price increases. BoJ Governor Shinichi Uchida acknowledged the recent agreement between the US and Iran regarding a peace deal's basic structure as a "welcome move", but highlighted lingering uncertainty about global oil supplies' recovery pace.
This decision makes the BoJ the second G7 central bank to raise borrowing costs since the Iran conflict began, following a similar move by the European Central Bank last week. In contrast, both the US Federal Reserve and the Bank of England are expected to maintain their current interest rates at upcoming monetary policy meetings. The BoJ's decision cited a diminished risk of Japan's economy sharply deteriorating from the Middle East conflict, partly due to the government's relief package assisting households with high fuel costs.
Historically, the BoJ has navigated extreme monetary policy shifts, including hiking rates to 9% in 1973 to combat inflation from the Opec oil embargo and introducing negative interest rates by 2016 to pull the economy out of a prolonged deflationary period following its asset bubble bursting in the late 1980s. The latest rate increase represents a significant departure from these earlier approaches.
The Nikkei share index closed at a record high of 70,000 points, indicating investor confidence in Japan's economic outlook despite the rate hike. This substantial surge of over a third so far this year reflects investors' optimism about the country's prospects, potentially tempering concerns about the impact of rising interest rates on household finances.